In Discussion paper No 1309 Diego Puga and Research Fellow Anthony J Venables, analyse whether a preferential trading arrangement can cause a divergence of production structures and welfare levels across nations that integrate. And, whether we should expect such divergence to eventually fade out and give way to a phase of convergence. The authors concentrate on two types of trading arrangements; the formation of a customs and hub-and-spoke arrangements – which give a region (the hub) better access to other regions (the spokes) than to those within the hub.

They find that a preferential move towards a customs union attracts industry to the integrating countries. When internal barriers fall below some critical level, input-output links between imperfectly competitive firms lead some customs union countries to gain industry at the expense of others. Closer integration can bring converging industrial development to the union. A hub-and-spoke arrangement favours location in the hub, with better reciprocal access to spoke nations than to each other. Further liberalization induces agglomeration in the hub and may trigger disparities between the spokes.